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Cisco, Microsoft: Cozy competitors

Companies plan to work more closely to make sure their products interoperate, while remaining competitors in several markets.

NEW YORK--Three years ago, when Cisco Systems and Microsoft launched competing security solutions, they looked to be on a collision course, but on Monday the companies' CEOs took the stage together to discuss working more closely together.

Microsoft CEO Steve Ballmer and Cisco CEO John Chambers said the companies will continue to compete head-to-head in several markets, but they will also work together to make sure their products interoperate.

The executives, who answered questions from TV journalist Charlie Rose and other business journalists at a press event here Monday, said the decision to work more collaboratively is being driven by customers who want to be able to mix and match products and technologies from each of the companies. And while Ballmer said he'd rather not have to compete against Cisco, he said it was a market reality.

"Some people like to see things in black or white," he said. "We're either partners or competitors. But the relationship is much more complex. It's what our customers want. And we have to work together in a sophisticated fashion to give customers what they want."

Ballmer and Chambers
Credit: Marguerite Reardon
Microsoft CEO Steve Ballmer (left)
and Cisco Systems CEO John
Chambers (right) sit down with
Charlie Rose (center) to discuss
how the companies plan to work
together as they increasingly
become competitors.

Indeed the notion of "co-opetition," or competing and cooperating, has existed for years. In the enterprise software market, companies like Oracle and SAP have both partnered as well as competed against one another. The result has been tremendous growth, but striking the balance between partner and competitor hasn't always been easy. And in many instances partnerships have turned sour, erupting into lawsuits.

But Chambers said that keeping customers as the focus of the relationship between his company and Ballmer's is the best way to ensure success. And he said in his opinion this has not always been the case with previous big partnerships. He believes that if Cisco and Microsoft can give customers what they want by allowing them to pick and choose overlapping and competing products from either Cisco or Microsoft, that the entire market will benefit.

"If you do what is right for the customer, the whole industry will grow," he said. "Even though we might each have a smaller share in the market, there will still be a much bigger pie for everyone. And we'll all make a lot more money."

Over the years, Cisco and Microsoft have each risen to dominance in their respective areas. Cisco has been crowned the king of the IP networking market, garnering more than 80 percent market share in the IP routing and switching equipment category, the plumbing that connects corporate networks and the Internet. And Microsoft has long dominated the desktop and operating software market with its suite of Office products.

And even though the companies have been solving different IT needs, they essentially share the same customer base. And because of this, they've had a loose partnership for nearly a decade.

Creating customer confusion
But as Cisco and Microsoft each began expanding into other markets, they found themselves stepping on each other's toes. What resulted was confusion among their customers who felt they were being forced to choose solutions either from their networking vendor Cisco or their software supplier Microsoft. And because they were being pitched solutions from each company's sales team, they were confused about where the products complimented each other and where they competed.

"Our customers just want to understand when we're going to work together and when we're going to compete," Chambers said. "And they don't want to be put in a no-win situation where they have to choose one of the other."

During the past seven months, the companies intensified efforts to work together. And on Monday they officially announced that they have committed to collaborating in seven areas, including security, mobile computing, information technology architecture and unified communications.

Within these areas the companies will dedicate engineering efforts to make sure products interoperate. And they'll work with their sales and marketing teams to better educate customers about how the Cisco and Microsoft solutions can work together. And the executives themselves will work more closely together to better articulate that vision to customers.

"The one commodity I get to allocate personally is my time," Ballmer said. "We have partners that I meet with regularly like HP, Intel and Dell. And even though John (Chambers) and I have always had a good relationship, we haven't committed to regular meetings. And that's what we're going to be doing."

The companies have already seen some success with this new strategy in the security market. About three years ago, Cisco and Microsoft introduced their own versions of security architectures to prevent viruses and worms from infecting networks. Cisco came up with its network-based solution called Network Admission Control, or NAC, and Microsoft began pushing for its client-based solution known as Network Access Protection, or NAP.

Customers were interested in the new architectures, but they were upset by the lack of interoperability, said Bob Muglia, a senior vice president at Microsoft. Microsoft and Cisco committed to working together to solve this issue and in the process discovered that their products could compliment one another.

While the companies do not sell the solutions together, executives from both companies admitted that their sales teams recommend pieces from the other's solution for certain implementations.

"At first we believed we could solve the whole problem ourselves," said Charles Giancarlo, Cisco's chief development officer. "And Microsoft said the same thing. But we quickly realized that the solutions were complementary."

But it wasn't until Cisco and Microsoft started pushing into "unified communications" that Ballmer and Chambers saw the need for even deeper collaboration between their companies. Within the past year, Cisco and Microsoft have announced competing versions of communications products that allow business customers to make phone calls directly from their desktops, message one another, and see if co-workers are available or not all from a single unified communications client.

While the market for unified communications is still relatively small, Ballmer and Chambers each acknowledged the potential is huge for each company. But it's also the market where the companies are likely to butt heads the most. In fact, Microsoft has partnered with Cisco rival Nortel Networks to provide hardware pieces to the solution.

Zeus Kerravala, a vice president with the Yankee Group, said this market will likely test the budding partnership more than any other sector.

"There will definitely be pockets of collaboration between the companies," he said. "But unified communications is one area where I think it's going to be highly competitive and difficult for them to manage this relationship. This is a customer-facing application, and they each want to own it."

The consumer market will also likely present challenges. While Microsoft has its Xbox and media center platform to serve up Internet content to televisions, Cisco has the Scientific Atlanta set-top boxes and the yet to be released consumer set-top box from its Kiss acquisition that will also help people warehouse and view media. While wireless technology from Linksys will likely be used to help shuttle media from these boxes to the TV, Cisco and Microsoft would each like to see their devices used in homes.

"I have a lot of respect for Cisco as a competitor," Ballmer said. "But I've got more respect for us. If they want to compete, we'll say, 'Bring it on.' And I'm sure John would say the same thing. And that's okay. We've learned to say that to each other in a respectful way."

Chambers agreed that the companies will vigorously compete. And he admitted it would be difficult, but he said Cisco and Microsoft have no other choice but to work together.

"Steve and I are both sales guys at heart," he said. "And the customer comes first. So we have to find a way to make this work."